“Oh the weather outside is frightful But the fire is so delightful And since we've no place to go (there is no other business I love) Let It Snow! Let It Snow! Let It Snow!”
I am writing this on a cold and dreary day in Memphis drinking my hot tea, looking out my office window at the frozen parking lot below. Certain parts of the country have already had a lot of snowfall.
It gets cold in Memphis, just not as often as New York. But cold is cold no matter where you are. To protect ourselves from it, we need to take precautions. Harm can happen when we are unprepared and encounter cold conditions, literally and figuratively.
Fortunately most of us will survive the cold without serious problems since we have in fact made provisions to deal with this inevitable cold weather. We have warm places to live and work and warm clothes and most of us are pretty safe.
The weather is not the only thing that's sometimes cold. The car business can get pretty chilly. Some industry observers say dealers may not be able to keep pace with the hot sales of the last several years.
The car business can get cold. Smart dealers make provisions for this potential chilling of the market. They've made sure that, while the car business is frigid and the ground outside is frozen, their capital is not. Use the accompanying worksheet to take your temperature.
I hope your temperature test came back better than the dealer's in the worksheet. Sing with confidence knowing you've made the proper provisions.
“It doesn't show signs of stopping And I've bought some corn for popping (I was a Boy Scout) The lights are turned way down low (always looking for ways to save a buck)Let It Snow! Let It Snow! Let It Snow!” (Because we've provisions for potential cold car sales!)
Don Ray is a senior member of the George B. Jones Dealer Services division of Dixon Hughes, a national accounting and consulting group for dealers. He's at 901-684-5643 and [email protected].
FROZEN CAPITAL WORKSHEET
| Contracts in transit and vehicle receivables should not exceed seven days vehicle sales | EXCESS | ||||
| $3,959,734 | 23.33% | $923,938 | $1,422,540 | $498,602 | |
| last mo. sales | factor | objective | actual | ||
| Customer receivables should not exceed 50% of fixed operations sales | |||||
| $423,560 | 50.00% | $211,780 | $243,692 | $31,912 | |
| last mo.sales | factor | objective | actual | ||
| Factory incentives/rebates (should not exceed 1.5 times last month incentive/rebates) | |||||
| $37,421 | 150.00% | $56,132 | $58,489 | $2,357 | |
| last mo.amts | factor | objective | actual | ||
| Warranty receivables (should not exceed 35% of warranty sales) | |||||
| $95,044 | 35.00% | $33,265 | $36,446 | $3,181 | |
| last mo.sales | factor | objective | actual | ||
| Parts inventory (should not exceed two months dollar supply at cost) | |||||
| $205,802 | 2.00 | $411,604 | $507,309 | $95,705 | |
| last mo. COS | factor | objective | actual | ||
| New vehicle inventory (should not exceed 2.5 month's dollar supply at cost) | |||||
| $1,820,725 | 2.50 | $4,551,813 | $5,380,373 | $828,560 | |
| last mo. COS | factor | objective | actual | ||
| Used vehicle inventory (should not exceed 1.5 months dollar supply at cost) | |||||
| $1,572,781 | 1.50 | $2,359,172 | $3,087,601 | $728,429 | |
| last mo. COS | factor | objective | actual | ||
| Total Frozen Capital | |||||
| $2,188,746 | $2,188,746 | 5.00% | $9,120 × 12 mos. = | $109,440 | |
| Frozen capital × floorplan rate = monthly cost | annual cost | ||||
| Note: most dealers floorplan new vehicles, however, interest expense still represents a cost of excess inventory. | |||||
